Mark Hulbert: Fairness buyers are warned that reflation shouldn’t be all the time driving the market greater

Just a week ago, Goldman Sachs raised its forecast US GDP growth rate for the 2021 calendar to 8%, and since then the entire US stock market has declined 1%. That doesn't seem intuitive, but it shouldn't come as a surprise.

The relationship between economic growth and the stock market is far more unfathomable than most of us think. Some of the countries whose equity markets have produced the best returns over the long term have seen the slowest economic growth.

This is the conclusion I came to when I was analyzing the stock market and economic performance of 17 developed countries up until the 1870s. What I found is shown in the table below. Note the lack of a positive correlation between the growth rates of real GDP per capita and the real and inflation-adjusted return on the stock market. (I based my analysis on data described in a 2019 study in the Quarterly Journal of Economics, entitled "The Rate of Return on Everything, 1870-2015.")

One way to quantify this pattern is to look at the correlation coefficient. On the graph, it would be 1.0 if a country's real GDP per capita growth rate were perfectly correlated to the real total return growth rate of its stock market – and minus 1.0 if the correlation were perfectly reversed. The coefficient would be zero if, in one way or another, there was no discernible relationship.

For the data in the attached table, the correlation coefficient is 0.02, which is insignificantly different from zero.

Others have pointed to the poor informative value of a country's economic growth for equity investors. For example, Jay Ritter, a finance professor at the University of Florida, calculated that the correlation coefficient for 16 countries between 1900 and 2002 was minus 0.37.

Joachim Klement, investment strategist at Liberum Capital in London and trustee of the CFA Institute Research Foundation, achieved a similar result when he expanded his focus to 22 industrialized and 22 emerging countries. Klement reported on his results in the Journal of Investing and found "in none of these cases indications of a positive correlation between stock market returns and the real per capita growth of the gross domestic product (GDP)".

Why should a country's economy be so unable to explain the development of its stock market? The factor by far the greatest explanatory power, according to a study published in the Financial Analysts Journal in 2018, is whether a country's stock market has suffered from dilution (more shares issued than repurchased) or accretion (more repurchases than shares issued) Has. . "Net buybacks explain more than 80% of the cross-sectional dispersion of stock market returns (across countries)," the study's authors write.

Of course, net buybacks are not a short-term market timing tool. This research therefore does not allow us to predict how the stock market will perform in the next few weeks or months. I would like to point out, however, that so far this year, more shares of publicly traded US companies have been issued than have been bought back. This means that net buybacks are negative and therefore have a dilutive (bearish) effect on the US stock market.

The more important lesson from this research is that we shouldn't be surprised that the stock market did not rise immediately in response to upward revisions in forecast economic growth.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings track investment newsletters that pay a flat fee for testing. He can be reached at

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